The following is my guide to QRP / Solo401ks and a light discussion of SDIRA or Self Directed IRA for retirement or tax-sheltered plan.
What is a QRP Retirement Plan? It’s a tax-sheltered investment vehicle that you can invest in pretty much anything where your money grows tax-free but it is intended for retirement and the downside (why I don’t do one personally) is that you can’t touch the money until you are old 🙁
If you have a 401K or Roth or IRA you need to start using a QRPs or qualified retirement plan!
If you are running low on cash because you have been picking up deals left or just broke because you have been listening to mainstream dogma and you have money in your retirement plans this is for you!
Damion Lupo was a previous guest on episode #40
Here is the webinar! Enjoy and send me questions to post the answer below.
If you are late to the game of investing in alternative investments like real estate (imagine that) and already have a large 401K over $100,000 then you should convert it to a Solo401K or Solo401k Roth version. At that point you can slowly take money out to minimize your taxes (not go into the highest tax bracket) and invest in the meantime as you “leak” the money out of the Governments control.
My order of contributing to these (future money) accounts after you take of (today money) regular liquidity. [I suggest per hour Coaching]:
1st QRP – contribute at least until the match.. 100% return
2nd IRA – Flexibility to self-direct
3rd SERP – liability of the employer.. pays out when you leave or after retirement age or a designated age in the future
There are a couple caveats to point out:
- When you have money in these accounts it sounds good that you are not taxed on gains but you are restricted from getting a Fannie Mae loan. Using the QRP loans get you the second tier financing options, for example, a Roth IRA can buy real estate on leverage, however, will need a non-recourse loan which is often a fraction high-interest rate and lower LTV. No Bueno!
- QRPs like your 401Ks or IRA accounts is pretty much locked up until you are “old”. There are some provisions to get the money out when you are 45 years old but you need to eat today. So I recommend a holistic strategy of blending your investment funding from both QRPs and you regular liquidity. We can likely discuss this in a quick 1-hour coaching call.
Info on using retirement funds for syndication deals:
Question: I am considering investing in a 506c investment on a multifamily property. They are raising a 1 million from investors, then getting a loan and making improvements to the property and repositioning it over 5-7 years. I wanted to use my funds from my SEP IRA which is currently in a qualified intermediary trust. What is the UBIT tax? Will I be subject to that on this deal? Also, should I set up an LLC that then loans the money to their LLC? How can I structure this for tax and liability benefits?
Answer [Note: From CPA and not this is NOT legal or professional advice]: When you invest in a business (syndicate = business) with your IRA, the IRA will be subject to UBIT (unrelated business income tax) and UDFI (unrelated debt-financed income).
For our purposes, UDFI is produced when an IRA uses debt to purchase real estate. Essentially, the portion of the property’s income considered UDFI is based on the percentage of rental income derived from debt.
For example, Property A is purchased for $100,000. You put down 25% of the purchase price as a down payment and finance the remaining 75% with a traditional mortgage from the bank. The property produces $10,000 in net income for the year. $7,500 (75%) of the net income is considered UDFI and is subject to UBIT.
There is a deduction for the first $1,000 of income subject to UBIT. Income subject to UBIT over $1,000 is taxed at trust rates. For 2017, trust tax rates start at 15% and max out at 39.6% after just $12,400 of income subject to UBIT.
UBIT is paid by the IRA account. If for whatever reason UBIT is paid directly by the taxpayer, the amount paid is considered a contribution to the IRA.
Follow up question: Is there any difference in how the UDFI will apply for these:
1) SD IRA
3) Solo 401K
4) SD IRA (operated as an LLC) so this one is confusing… My LLC owns an LLC (syndication) which owns a property such as 150-unit on 123 main street
Question: I’m trying to decide if one is better than another for tax purposes?
Answer: The solo 401(k) is not subject to UDFI but it subject to UBIT. The IRAs are all subject to UBIT and UDFI. Note that generally the passive income flowing back to you is very low and the, as a result, we don’t see a huge UBIT tax.
Another idea would be to take a debt position (lending) rather than equity. The interest you would receive is free of UBIT and UDFI tax.
(This suggestion of a “debt” position or note investment with the SEP IRA to avoid UBIT and UDFI tax is a creative one… but it’s a very low chance of happening because it’s just too complicated and honestly not worth the effort from the syndicators’ side. It’s a very similar case of to a Tenant-In-Common (TIC) arrangement where an investor has 1031 exchange funds and wants to parlay that money into a syndication. It’s possible but from the syndicator’s perspective a lot of unneeded work when you can just raise the funds the traditional way. Caveat: if you are bringing in a huge amount of money say 50% of the raise then that might tip the scales in your favor)
Ask you can tell this is a really grey area. One CPA mentioned, the answer depends on how you structured the syndication, UBIT may or may not apply for the real estate holding for solo 401k. I would really try to toss the Operation Agreement to your individual CPAs to examine and determine ahead of time as I am not a CPA 😉
Caveat: If you are late to the game and already have a fat 401k then you should convert it to a solo401k. At that point, you should think about putting it into a syndication since you are restricted on how you can leverage it.
So if you are going to have one of these QRP accounts since you have an old 401K or old retirement accounts want to self-direct it in good investments and don’t want to take a huge tax hit right away set up a Solo401k or Checkbook control.
Hey Lane! I asked my CPA [who actually knows what they are doing… let me know if you want a referral] and here is what they said… [my additons]
- Get a quick pay per hour coaching call to see how this plays into deals coming up in the Hui Deal Pipe Club.
- Get set up here or ask me for a warm email intro.
- And get the free book on QRPs!
Here are the podcast notes:
To get to know Damion more go to SimplePassiveCashflow.com/damion
I have been having a lot of calls with listeners having exhausted their liquidity and have money in their 401K or IRA’s still in Wall Street Investments.
One of those ways to get the money out is via a QRP or Solo401K.
Today’s guest Damion Lupo with discussing – SimplePassiveCashflow.com/qrp to get a free copy of his book
I cashed out my 401k because I figured I was going to pay the taxes anyway and my tax load would be a lot higher in the future and I wanted access to my money before retirement age.
Visit CrowdfundAloha.com – a website dedicated to helping hard-working middle-class people build real estate portfolios.
$26 trillion in retirement plans. You have all sorts of money that can be tapped into, but fear holds you back.
As an investor, Damion has purchased 150 houses in 7 states ($20 million portfolios).
2008: went from $20 million to -$5 million. Had to start all over.
Beyond money, find out your why. Read Simon Sinek “Find Your Why.”
Mission Statement: Free 1 million people from financial bondage.
I.R.S takes 70% of the average person’s money.
The QRP (Qualified Retirement Plan): “The Ferrari of 401(k)’s.”
You probably haven’t heard of QRP as Wall Street tends to control your stuff.
QRP allows you invest in many real estate options (syndications, lands, rentals, apartments, commercial, international deals, HML, etc.).
Total control, fixed fees, endless choices, and FAST with QRP v. Self-Directed IRA. 10X contributions and control with no custodian.
SDIRA will lose 1/3 of profit as UDFI triggered. QRP – Roth has no UDFI – keep 100% profit.
Can keep 401(k) at W-2 and sign up for QRP. Max contribution would be $55,000 in combined plans – $28,000 in the QRP.
QRP can hold other non-real estate investments, such as gold, silver, Cryptocurrency, etc.
Build-in credit line in a QRP. Up to $50K in cash.
Investors, self-employed, and family members are all qualified.
Properties you have or use right now cannot be placed moved in a QRP.
To fund, can rollover any IRA, 401(k), +TSP, 403b, 457.
66% people are worried about not having enough money for retirement.
Free copy of QRP book at www.simplepassivecashflow.com/QRP